## [# Swedroe: Hedge Funds Still Trailing](/sections/index-investor-corner/swedroe-hedge-funds-still-trailing)
# Swedroe: Hedge Funds Still Trailing
This year isn’t looking like it will break their losing streak.
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[By Larry Swedroe](/contributors/larry-swedroe)
Jul 20, 2018
Edited by: Larry Swedroe
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Hedge funds entered this year coming off their ninth straight year of trailing U.S. stocks (as measured by the S&P 500 Index) by significant margins. And for the 10-year period ending 2017, one that included the worst bear market in the post-Depression era, the HFRX Global Hedge Fund Index produced a negative return (-0.4%), underperforming every single major equity and bond asset class.
The following table shows the returns through the first six months of 2018 for various equity and fixed income indexes. The [HFRX Global Hedge Fund Index](https://www.hedgefundresearch.com/family-indices/hfrx) returned -0.8% over that period.
First Half
2018 Return (%)**HFRX Global Hedge Fund Index**-0.8 **Domestic Indexes** S&P 500 2.6MSCI US Small Cap 1750 (gross dividends) 6.6MSCI US Prime Market Value (gross dividends)-2.0MSCI US Small Cap Value (gross dividends)4.0Dow Jones Select REIT 1.8 **International Indexes** MSCI EAFE (net dividends-2.7MSCI EAFE Small Cap (net dividends)-1.3MSCI EAFE Small Value (net dividends) -3.9MSCI EAFE Value (net dividends) -4.6MSCI Emerging Markets (net dividends)-6.7 **Fixed Income** Merrill Lynch One-Year Treasury Note 0.7Five-Year Treasury Notes -1.220-Year Treasury Bonds -3.0As you can see, the hedge fund index underperformed four of the five U.S. equity asset classes, but outperformed all five of the international equity asset classes and two of the three bond indexes. However, we can take our analysis a step further and determine how hedge funds performed against a globally diversified portfolio.
**Key Comparisons**
An all-equity portfolio allocated 50% internationally and 50% domestically, equally weighted among the indexes from the table within those broader categories, would have lost 0.6% through the first half of the year, outperforming the hedge fund index by 0.2%age points.
Another comparison we can make is to a typical balanced portfolio of 60% equities and 40% bonds. Using the same weighting methodology as above for the equity allocation, the portfolio would have lost 0.1% using one-year Treasuries (outperforming the hedge fund index by 0.7 percentage points), lost 0.9% using five-year Treasuries (underperforming the hedge fund index by just 0.1 percentage points), and lost 1.5% using long-term Treasuries (underperforming the hedge fund index by 0.7 percentage points).
Given the results, and the wide dispersion of returns between U.S. and international equities, one might think hedge funds would have used their freedom to move across asset classes, which they often tout as their big advantage, to better effect.
The problem is that the efficiency of the market, as well as the cost of the effort, can turn that supposed advantage into a handicap. Given the evidence on hedge funds’ underwhelming results, it’s a puzzle why they are still managing about $3 trillion in assets.
I’ll report back again on hedge fund performance after the third quarter.
*Larry Swedroe is the director of research for* *[The BAM Alliance](https://thebamalliance.com/), a community of more than 140 independent registered investment advisors throughout the country.*
[ Larry Swedroe ](/contributors/larry-swedroe)
Larry Swedroe is a principal and the director of research for Buckingham Strategic Wealth, an independent member of the BAM Alliance. Previously, he… [View Bio](/contributors/larry-swedroe)
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